A Tall, bold Slugger set Vivid against the little, soft cities

Another piece of evidence that futures exchanges are about gambling rather than the commodity business is the widespread popularity of bucket shops. These are firms that accept bets on commodity prices, but match them among their customers rather than trading them on the floor of the exchange. They are bookies, pure and simple, taking bets on commodity price movements rather than sporting events. They offer the same economic bet as a futures contract, but charge less commission, allow transactions in smaller sizes, stay open later, and offer greater leverage than exchange brokers. They also offer more consumer choice. A popular contract was what we call today a down-and-out call option. The buyer puts up a small amount of money to take a bet on a large amount of commodity. If the price of the commodity falls to a certain level, the buyer loses, even if the price later goes back up (that's the down-and-out feature). But it means a small investment with limited loss can return a huge profit, if the price goes up and keeps going up. An up-and-out put is a similar bet that the commodity price will go down and keep going down. A futures contract also offers the ability to make a large bet with a small amount of money down, but the investor is on the hook for the full loss in that case. Exchanges did offer options trading (called "privileges" at the time) but eventually outlawed them to more clearly distinguish themselves from bucket shops.

By the way, you see a lot of fanciful explanations of the name bucket shop, usually involving some disgusting dregs of beverage processing sold to the most desperate alcoholics, or an insidious drug whipped up in street-corner buckets, or a penny-ante scheme to steal price quotations using a bucket and a rope. This is all exchange propaganda. None of those bucket shops ever existed, nor did they give their name to the financial kind. The term to bucket orders, meaning to combine or offset customer orders, was common and not pejorative. Exchange brokers did this all the time and ran most of the bucket shops until the exchanges prohibited that practice. Only the exchanges, and the newspapers they advertised in, hated the bucket shops.

Clearly, the bucket shop has no connection to any real economic activity any more than numbers games that pay off based on the last digits of the volume number of the New York Stock Exchange or Treasury auctions. They're just bets on numbers, and it doesn't matter that the numbers are determined in a financial institution instead of a ballpark or racetrack. It's just as clear that there's no real difference between the bucket shop and the futures exchange. Customers used them interchangeably. It's true that small-volume customers preferred the retail-friendly, inexpensive, convenient bucket shops, and larger wholesale customers needed to go to exchange brokers to execute in larger size, but many customers fell in the middle. Also many shops were run by exchange members or used the exchange to lay off bet imbalances. The exchanges finally won a long legal battle to have the bucket shops declared illegal, despite their inability to show any difference between the exchange and the shops. Bucket shops are similar to "curb" exchanges run by nonmembers of the exchange on the streets outside major exchanges, offering street-corner transactions at trading-floor prices and cut-rate commissions. The American Stock Exchange began life as the curb exchange to the New York Stock Exchange. It didn't change its name from "the Curb" until 1953.

The reason the bucket shops eventually lost was that they could not concentrate enough capital to make meaningful infrastructure investments. In the early days, traders learned at bucket shops and acquired a stake to join the exchange. That was how Jesse Livermore, the famous stock trader known as The Great Bear, got his start. But as more capital became available, the nickels and dimes concentrated by bucket shops lost their relative significance.

From the standpoint of people dealing in physical commoditiesfarmers, transporters, and processors-the futures exchange operated like a bank, but one that accepted deposits in and lent commodities rather than money. It was definitely a soft money bank, since the amount of deliverable physical commodity was always a small fraction of the amount that had been lent out. Then and now, farmers seldom used futures contracts. No one wants to deposit into a soft money bank.

Processors did like to borrow, however. This is done by a transaction called going short against physical. The processor would buy whatever he wanted to transport, store, clean, grind, or otherwise process. He would get the exact grade and type he wanted-not necessarily something that met contract specifications for delivery in the futures market. He would then sell the same amount of the commodity (or the closest he could find in a futures contract) at a future date, close to the time he expected to finish his processing.

This combination is sometimes explained as hedging the price risk of inventory. If the price of the commodity goes down during processing, the processor makes a profit on the futures position to offset the loss in value of his inventory; if the price goes up, the processor can afford the futures loss because the value of his inventory went up. This scenario, however, does not correspond with reality. When you look at the larger picture, the processor might be in the opposite position. He may have already sold his output at a fixed price, in which case he has no inventory price risk. He may even be negatively exposed to a rise in price of inventory. That usually means a shortage of the commodity, which reduces the value of processing facilities and more than offsets any gain on inventory.

In practice, most processors stuck to their businesses and were content to pay and receive the average input and output prices. Commodity price fluctuation was a very small part of their overall business risk. Commodities were not even a large part of their costs, compared to labor, fuel, interest, and other inputs. What they did care about was steady, predictable supply of raw material that allowed them to run their facilities at low cost and make long-term commitments to buyers. This-not hedging inventory price risk-led to a successful business.

The desire for stability encouraged the processors to buy large amounts of commodities-perhaps enough for three months of processing. A miller, for example, might buy a three-month supply of cleaned wheat from a grain elevator and sell wheat futures at the exchange. That gives him wheat now and a promise to repay wheat in the future. In other words, he borrowed wheat. That grain elevator might sell much more wheat than it had on hand, secure that deliveries would be made before buyers called for their wheat. The futures traders kept close eyes on virtual demand (the three-months' supply the miller wants to hold for stability) and actual demand (the amounts the miller actually takes from the elevator). They were alert to anything that might interrupt the smooth functioning, crop failures, transportation shortages, problems with preprocessing, or increased milling rates. Careful backup plans were laid for every eventuality. Of course, each trader was looking at only a small part of the picture, and was doing it to make money rather than help anyone, but it worked far better than any centrally planned system.

If the infrastructure projects had been small or continuous, the exchanges would not have needed their essential gambling nature. They could have been sedate places of price discovery and planning. But either you build a rail line between two points or you don't. Whether or not you do it affects everyone in the network-every other rail line and every processor of every kind in every city. With a large, secure supply of capital, you could plan out the whole system and build it in logical stages. Without that, you've got to accumulate the available capital in one person's hands, and let him use it for the move that makes most sense to him. Everyone else will react, weather and other forms of luck will have their input, and someone else will get rich enough to make the next move. This system is brutal and unfair, ruthless and irrational, but it works with matchless efficiency. To a financially trained poker player, it's the most beautiful organization in history. This-rather than anything that happened in New York or Washington-is the source of the American economic miracle.

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Дата добавления: 2015-10-26